Boston Trust Company Ltd v Szerelmey Ltd

The claimants, trustees of the Erutuf Trust and shareholders of Tellisford Limited, were granted a pre-emptive indemnity from the assets of certain Szerelmey group companies to meet the claimants’ legal costs of pursuing a derivative action on the companies’ behalf. The court applied the established equitable principle in Wallersteiner v Moir (No 2) that a minority shareholder who is permitted to bring derivative proceedings for the benefit of the company is, in principle, entitled to be indemnified by the company for costs reasonably incurred. The judge found that the claimant’s pleaded causes of action had sufficient substance at the interlocutory stage and that this was not a mere partner dispute of the type in which an indemnity would be inappropriate. The indemnity was made subject to limits (indemnity to the stage of exchange of witness statements and review at pre-trial) and included past costs and provision for adverse costs; the question of allocation of costs already incurred was adjourned pending the outcome of an outstanding appeal concerning standing.

Background and parties: The proceedings were brought as a common law multiple derivative action by the trustees of the Erutuf Trust (the claimants) on behalf of Tellisford Limited and other operating companies in the Szerelmey group. The claimants allege that the fifth defendant, Mr Verhoef, a director and majority controller of the operating companies, misappropriated assets and transferred value to companies under his control, in breach of duty. The claim seeks restoration of misappropriated assets to the companies.

Procedural posture: Permission to continue the derivative claims was considered in a two-stage process. Ex parte permission was granted on 25 September 2019. A contested second-stage permission hearing before Mr Stephen Houseman QC in April–May 2020 resulted in conditional permission being granted subject to rectification of the company register to confer standing. The claimants obtained retrospective rectification and conditional permission therefore became unconditional. An appeal by Mr Verhoef against the permission decision was noted as pending in the Court of Appeal.

Relief sought before this court: The claimants applied for a pre-emptive (pay-as-you-go) indemnity from the companies’ assets to meet their ongoing and past legal costs of prosecuting the derivative claims, and sought indemnity for any adverse costs.

Issues framed:

• Whether a pre-emptive indemnity should be ordered in respect of the claimants’ past and future costs;
• Whether the claimants were required to show impecuniosity or a particular need to obtain such an order;
• Whether the strength and character of the derivative claims, and the commercial context, made an indemnity inappropriate (for example, as a partner-style dispute or where the company would be wound down); and
• How the costs already incurred should be allocated pending the appeal on standing.

Court’s reasoning and decision: The judge reviewed the authorities (including Wallersteiner v Moir (No 2), Jaybird Group v Greenwood, Iesini v Westrip and Wishart) and accepted that, where a shareholder is permitted to pursue derivative claims for the benefit of the company, an indemnity is normally available in principle. The judge rejected the submission that claimants must demonstrate impecuniosity or special need before an indemnity is ordered, relying on Lewison J’s reasoning in Iesini. He distinguished cases where indemnities were refused because the derivative proceedings were essentially partner disputes or where companies had no continuing purpose (Halle v Trax, Tonstate, Bhullar). On the merits at the interlocutory stage the Deputy Judge (Houseman QC) had concluded the four heads of claim had sufficient substance; the present judge accepted that assessment and therefore was satisfied that an indemnity was appropriate. The judge ordered a pre-emptive indemnity from the companies to the stage of exchange of witness statements (with review at the pre-trial review), covered past costs and provision for adverse costs, but adjourned the determination of how costs already incurred should be allocated until after the outcome of Mr Verhoef’s appeal against the permission decision.

This first-instance application for a pre-emptive costs indemnity is allowed in part. The court ordered that the Companies indemnify the claimants for costs (including costs already incurred and exposure to an adverse costs order) up to the stage of exchange of witness statements, with a review at the Pre-Trial Review; the final allocation of costs already incurred inter partes was adjourned pending the outcome of the defendant’s appeal against the permission decision. The indemnity was ordered because the derivative claims were found to have sufficient interlocutory substance and the equitable principle in Wallersteiner applied; the court distinguished authorities where indemnities were refused on their facts and rejected the requirement that impecuniosity be shown.

Proceedings originated with ex parte first-stage permission granted by Charles Hollander QC on 25 September 2019. A contested second-stage permission hearing was determined by Mr Stephen Houseman QC in April–May 2020, who granted conditional permission (see his judgments of May 2020) subject to rectification of Tellisford’s register. The claimants obtained retrospective rectification on 23 July 2020 and permission became unconditional. The judgment records that Mr Verhoef has appealed the permission decision and that the appeal is listed for the Court of Appeal in April 2021. This judgment deals with the claimants’ application for a pre-emptive indemnity and related costs issues; the allocation of costs already incurred was adjourned pending the outcome of the Court of Appeal appeal.